WASHINGTON (Reuters) - The freefall in the global economy is showing signs it is starting to abate but 2009 is still expected to be a difficult year, International Monetary Fund Managing Director Dominique Strauss-Kahn said on Thursday.
In a speech to the National Press Club in Washington Strauss-Kahn said, however, the world economy was expected to enter “deeply negative territory” this year before it starts to recover during 2010.
“Of course, the solutions differ by country, but there must be a coherent and coordinated response by the international community,” he said.
The IMF is scheduled to release updated world economic forecasts on Wednesday. Last month it forecast the world economy would contract between 0.5 percent to 1 percent this year.
Strauss-Kahn emphasized that before a recovery can begin in earnest, governments in advanced economies need to fix the financial sector by cleaning banks’ balance sheets of toxic assets.
“Until this is done, attempts to restore demand are likely to falter,” he added. “We need forceful and urgent action, as well as coordination among the affected economies,” he added.
He said the U.S. plan to deal with affected bank assets was a “major step forward” but its success depended on the willingness of banks to sell their toxic assets.
The United States has been mired in a severe recession since the collapse of the U.S. housing bubble in 2007.
New IMF research published on Thursday said recessions tied to financial crises were unusually long and severe, and the recovery sluggish.
It called for aggressive and coordinated monetary and fiscal policies, and said restoring confidence in the financial sector was important for economic policies to work.
Strauss-Kahn also urged countries not to withdraw fiscal stimulus too early and efforts need to be sustained in 2010 “because we are not out of the woods yet.”
He welcomed commitments from the Group of 20 summit in London on April 2 to triple IMF resources to a total of $750 billion to help emerging economies hard hit by falling demand and dramatic declines in private capital flows.
Strauss-Kahn said by increasing the IMF’s resources, “the world community has placed its trust in the IMF and we intend to live up to that trust.”
“It cannot simply be business as usual. The IMF needs to adapt,” he said, adding that IMF lending needs to be flexible and better tailored to countries’ individual needs.
He said it was also important that countries come to the IMF for help early, before the crisis takes a toll.
To be effective, he said the IMF also needs to increase the voting power of rising economic powers, under a plan endorsed by the IMF last year but waiting the approval of legislatures of member countries, including the United States.
Reporting by Lesley Wroughton; Editing by Neil Stempleman